Apple Needs to Think Differently

I watch with wonder and concern about Apple, as a longstanding customer (starting in December 1998). As a journalist, I developed a reputation for hating the company (I don’t) so long loved because my stories aren’t kiss-ass fanboyism. What’s that saying about being hardest on the ones you love most? Kind I am not.

Today’s theme isn’t new from me and repeats my analysis that Apple has strayed far from the path that brought truly, disruptive innovative products to market. In 2016, the company banks on past successes that are not long-term sustainable. We will get a glimpse after calendar fourth quarter 2015 earnings are announced on January 26th. You will want to watch iPhone and international sales, particularly emerging markets.

Platform Dilemma
My longstanding Apple love-affair has been schizophrenic, because for so many years Microsoft was my main tech news reporting beat and using the company’s products made my writing more authoritative by using them. But I preferred Apple platforms, frequently switching. For example, I celebrated Windows XP’s release in October 2001 by declining dinner invitation with Microsoft cofounder Bill Gates and switching back to OS X the day XP launched. Even after boycotting Apple for six months in 2012, for its ridiculous patent lawsuit strong-arming, I returned to using the company’s products.

But my platform schizophrenia changed in the years following Apple cofounder Steve Jobs’ death. On the one hand, Google’s platforms provide greater, and better, contextual utility.than do its bitten-fruit rival. On the other hand, I’m the gambler who keeps going back convinced that this time he will win big, that the loseing streak will end. Meaning: I switch to and from, looking for the user experience that made me feel happy when using Apple products. But I can’t find it.

Much of the magic goes back to Steve Jobs, and how he made you feel about new Apple products. For years I’ve explained: When Jobs had an off-day keynote, you left feeling like your life would be better for buying the new thing. But if he was on, you left feeling that if you didn’t buy the thing your life would be worse.

But the magic was more than marketing. Or drinking the so-called Kool-Aid. For years, I always came back to Apple, never strayed far, because the products made me feel happy, and I got more work done in less time than, say, using Windows. But more than 17 years after hauling my first Mac out of a CompUSA, the fire in my heart is extinguished, and that’s why I write this analysis. Deeply concerned am I.

Logistics Brilliance
Apple CEO Tim Cook is a manufacturing and distribution genius. He’s a master at defying typical mass-market, consumer retail product pricing and SKU strategies and in process wringing tremendous gross margins in the process (39.9 percent during calendar third quarter 2015). He’s the man that figuratively made the printing press that mints money ($11.1 billion net profit in Q3). He stayed the course of premium pricing and brand allure, when other PC companies competed for the lowest price and while analysts opined that cheaper Macs would build market share.

Cook’s tenure as chief executive, and influence over Apple strategies, technically is longer than his officially assuming the role nearly 5 years ago. From then CEO Steve Jobs’ January 2009 leave of absence to his death in October 2011, Cook’s control over day-to-day operations shaped what would become the financially ginormous tech titan that marvels the industry today.

Among the many validations: During 2015, global PC shipments plummeted 10.5 percent year over year, according to IDC. Apple was the shining star, growing by 2.8 percent, despite the majority of its computers selling for significantly more than $1,000. During calendar Q3 2015, Apple’s net income was 2.5 times that of Microsoft, which was the previous computing era’s tech titan. Go back to the same quarter in 2009, Apple’s net income was just $1.67 billion compared to its rival’s $4.48 billion. Or, looked at differently, the company’s net income was 6.6 times greater during Q3 2015 compared to the same calendar quarter in 2009.

Jobs may have been the visionary, but Cook’s talented control over manufacturing logistics, effective expansion of retail distribution outlets, and sassy premium pricing strategies combined with intangibles like customer satisfaction are the secret to Apple’s decade 2010 success.

Cook’s Kitchen
However, Cook has not proven to be the visionary leader that Apple needs to maintain long-term success. In a bitterly biting September 2015 analysis, I called Cook’s crop—Apple Watch, 12-inch MacBook, and iPad Pro—“products without purpose“. No matter how much revenue these devices generate, none is disruptive innovation. Apple Watch is more fashionable than functional. One-hundred dollar discounts from Best Buy and Target during the holidays hint at real sales demand, or lack of it.

For Christmas shoppers, Best Buy slashed $300 off 12-inch MacBook’s MSRP, bringing the starting price to more reasonable $999. The laptop is pretty, and it sports clever keyboard and magnificent display, but the performance is more comparable to a budget Chromebook costing $300 or less..

iPad Pro is overly-large, and the dimensions, which remind of a giant iPhone, make the thing somewhat unbalanced in the hands; it’s awkward. The screen size has a touch of Tim Cook applying pricing tactics. Like $9.99 feels much less than $10; the 12.9 inches diminishes size perceptions, which really can’t change what the tablet packs: 13-inch screen, and that’s laptop size.

True innovation is this: Invention of something people don’t know they need until they use it and then react: “Wow, why didn’t I think of that? It’s so obvious”. Apple achieved such success by focusing on benefits not features. But even then, a company has to identify the right benefits. I see lots of clever design attributes in all three aforementioned products but benefits are compromised for fashion. In other words, form trumps function, rather than compliments it.

Much of the “Ah-ha!” moments during a Jobs “One More Thing” unveiling, and experience using it that followed, sparked the you didn’t know you needed realization. Is that really the emotional reaction to an over-sized tablet or new features like 3D Touch. Honestly?

Disrupt Thyself
Cook strays from Apple’s core philosophy, which extended from Jobs’ personality, as I understand it as an outsider but intimate observer: The aforementioned disruptive innovation, which often is misunderstood. Analysts, bloggers, investors, journalists, and others like to waggy-wag their fingers about how Apple successfully disrupts new or even established categories. They’re right. But what most of them overlook: How during the Jobs era Apple as often disrupted itself. The quality is fundamental to past successes and its absence assures Apple’s eventual fall from the tree; that is if nothing changes.

Risk defined the bitten-fruit logo company under Jobs’ leadership and willingness to drastically change the rules of competitive engagement. Let’s separate the concepts, which both are fundamental to Apple’s past disruptive innovation successes.

When Jobs launched OS X in March 2001, months before Windows XP, he disrupted OS 8.x-9.x, which had a fairly stable app ecosystem that developers supported. Architectural change coming when the majority of developers would follow the money, meaning XP, was madness—and done during a friggin’ recession. The pay-off wouldn’t come for years, but proved there can be great rewards from tremendous risk-taking.

Two months later, when Apple opened its first two retail stores, Jobs risked disrupting his tenuous reseller supply-chain. Channel conflict could have doomed the Mac, and definitely there were consequences as more stores opened. But this self-disrupting risk also paid off. As did many others.

My favorite is iPod nano, which introduction was a fuck you moment. During the Sept. 7, 2005, launch event, Jobs boasted: “The iPod mini is what all of our competitors have their sights focused on. We’re going to do something pretty bold. Today, we’re gonna replace it”. Apple’s cofounder went on to name the new iPod nano, then asked for a video camera to close-up on his jeans, and, pointing to the coin pouch, asked: “Ever wonder what this pocket is for? I’ve always wondered that”. He then pulled out the diminutive music player.

Under Jobs’ leadership, Apple did something unthinkable, by so blatantly defying the rules of retail: Killing off a product at the height of popularity, what was then the most purchased portable music player in the world. Just as competitors started shipping iPod mini knock-offs to stores for the holidays, Apple made their devices suddenly obsolete—bricks, by comparison. For all the cleverness of nano’s design, there was greater innovation from a product marketing perspective. The little music player was a giant middle finger lifted towards iPod mini imitators.

By contrast, Apple today stretches out the retail supply chain, which is good for return-on-initial investment and bolstering margins. So you see, for example, three generations of iPhone for sale and two-generations each for iPad mini and iPad Air. Adding the Pro disrupts nothing, but simply adds another SKU. That’s supply-chain thinking, rather than the self-disrupting mind.

Someone could argue that iPhone 6 and 6 Plus were self-disrupting—that such dramatically larger handsets risked pushing away some customers. Not when Apple kept selling smaller, older models and when market demand had shifted to larger smartphones. If anything, Tim Cook demonstrated risk-aversion and supply-chain thinking by taking so long to release handsets with larger screens. This is where his genius bows before logistics that make short-term revenue-generating, margin-maximizing sense at the expense of Apple’s innovation ethic.

By contrast, killing off the popular MacBook Air when introducing 12-inch MacBook would have been risky, self-disrupting innovation. But the innovative benefits, and plenty of them of them like the display or clever keyboard, are lost in continued strong sales of the older (and now less-costly) computer. Air eclipses MacBook’s appeal, which is lessened by price ($1,299 to $1,599) and compromises made for lightness and thinness (Intel Core M processor, among them). .

David Thinking
Alongside risk, and associated willingness to self-disrupt, Apple exhibited another potent corporate characteristic under Jobs’ leadership. Need, as much as anything else, compelled him to change the competitive rules of engagement, like David vs. Goliath in the Biblical epic. I first wrote about this concept here in May 1999, posting to BetaNews an updated version but with same headline—”Why Apple succeeds, and always will“—7 months later.

Arreguín-Toft produces excellent historical data showing that, in wars, when smaller rivals apply David Thinking they are more likely to win, even against mightier opponents. The Biblical example of David vs. Goliath is good analogy. Rather than fight like Goliath—and almost certainly lose by dawning armor and sword—David relied on his own strengths. A slingshot and stone kept him out of Goliath’s reach but on the offensive. The farmer changed the rules of engagement.

Goliath represents the status quo, as did Microsoft and Windows OEMs when Jobs donned title interim CEO in 1997. If you closely examine the categories where Apple disrupted established players during his tenure, the company changed the rules to favor its strengths and to prioritize benefits over features. Think of the wrapper that goes around your take-out coffee cup as a feature and protecting your hand from being burned as a benefit.

Apple’s colossal success over the past half-decade makes it Goliath, which shouldn’t predispose Tim Cook to status quo thinking but he does. And why not? Goliath naturally wants to play to his strengths, too. If you closely look at how little product SKUs change over several generations, how much innovation really is iteration, and how the approaches avoid big risks to protect existing revenue streams, Cook’s leadership strengths and foibles lay bare.

In May 2014, I regretfully stepped back from the “always will succeed” position when asserting: “Apple has lost its way“. As a long-time Apple customer, it was a disappointing realization reached.
The iPhone Empire
Why this all matters is the early-days changes sweeping smartphone markets. Five months ago, I warned about the “Collapse of the iPhone empire“, and I stand by the analysis, even more so in 2016. During calendar Q3 2015, iPhone accounted for 62.5 percent of Apple revenues—that’s up from 34 percent the same quarter in 2010, when total company revenues were less than a third as much ($15.7 billion vs $51.5 billion). Apple’s fortunes rose with iPhones sales success, and, given the current product lineup, will likewise fall.

So much dependence on a single product is the worst kind of risk, when taking risks to innovate could preserve and even extend Apple’s dominance as tech titan. Already by calendar Q2 2015, Gartner reported slowdown in global smartphone sales and the first decline in the largest market, China, which is hugely important to Apple—accounting for 24.3 percent of total company calendar Q3 revenues, exceeding Europe. During that quarter, Gartner’s global data shows increasing smartphone sales shift to emerging markets, where iPhone’s higher pricing poses potential problems.

In the short-term, Apple likely will benefit from the continued shift of existing customers on smaller iPhones to larger ones and switchers on big Androids returning to the iOS ecosystem. But as smartphone sales slow in maturing markets, sales shift to emerging markets, and U.S. carriers do away with margin-lifting subsidies, there must come the quarter where iPhone sales growth stalls or retreats. If Apple Watch or iPad Pro is Apple’s Plan B, uh-oh.

My personal loss of interest in Apple products is boredom, partly. For example, MacBook Pro is little changed from 2009 or the Air from 2010. Neither iOS or OS X is dramatically different or improved since Steve Jobs death. Logistics genius Tim Cook milks established product lines, which is great for preserving the status quo and maximizing margins. But as past innovations ripen, and some over-ripen, on the tree and no self-disrupting crop replaces them, the Apple orchard risks being bitten by blight. Risk would be less if there wasn’t so much dependence on one variety of fruit.